Today we are going to look at Surana Telecom and Power Limited (NSE:SURANAT&P) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Surana Telecom and Power:
0.073 = ₹108m ÷ (₹1.6b - ₹124m) (Based on the trailing twelve months to March 2019.)
Therefore, Surana Telecom and Power has an ROCE of 7.3%.
Does Surana Telecom and Power Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Surana Telecom and Power's ROCE appears meaningfully below the 12% average reported by the Electrical industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Surana Telecom and Power stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
In our analysis, Surana Telecom and Power's ROCE appears to be 7.3%, compared to 3 years ago, when its ROCE was 3.1%. This makes us think the business might be improving. The image below shows how Surana Telecom and Power's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. If Surana Telecom and Power is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Surana Telecom and Power's ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Surana Telecom and Power has total assets of ₹1.6b and current liabilities of ₹124m. As a result, its current liabilities are equal to approximately 7.7% of its total assets. With barely any current liabilities, there is minimal impact on Surana Telecom and Power's admittedly low ROCE.
Our Take On Surana Telecom and Power's ROCE
Nevertheless, there are potentially more attractive companies to invest in. You might be able to find a better investment than Surana Telecom and Power. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
I will like Surana Telecom and Power better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.